As Congress and the White House head toward another battle over extending the Bush-era tax cuts, a trade association representing utility companies is warning that investors could be in for a major hit if the rates for qualified dividends revert to their pre-2003 levels, even if the only rates that move are those for the wealthiest Americans.

The Edison Electric Institute (EEI) on Thursday released a study analyzing the age, income level and investment goals of investors in dividend stocks, concluding that any rate increase could cause a major sell-off and drain value from the normally stable companies known for high yields rather than volatility.

The current tax framework caps the rates for qualified-dividend income at 15%, but it will expire on Dec. 31 without action by Congress and the president.

President Obama is calling for an extension of the cuts for all but the wealthiest Americans, or those earning $250,000 or more annually. Republicans in Congress have been united in their calls for extending all of the cuts, inviting a replay of the showdown that occurred the last time the tax rates came up for renewal in 2010.

If a standoff looms, threatening to send dividend and capital gains rates higher, Jeff Sica, president and CEO of Sica Wealth Management, anticipates a sell-off before the end of the year.

"Taxation of dividends and higher capital gains tax will make individuals more likely to sell before January if there is an anticipation of higher taxes," Sica wrote in an email. "If tax cuts expire, individuals will invest less since it will cost them more in capital gains tax."

For the highest bracket, the dividend tax rate would spike to 39.6% percent, a prospect that EEI projected would prompt wealthy investors to move money out of dividend-paying stocks in favor of alternative investments with a higher rate of return. (The authors of the report noted that with the 3.8% Medicare surcharge on investment income included in Obama's health care law, the effective rate would be as high as 43.4%.)

The ripple effect, EEI argued, would see a flight of capital from utilities and other dividend stocks, driving down share prices and harming investors of all income levels. Alternatively, the group suggested that some influential investors could pressure the firms to find another path to deliver value to shareholders, but in either scenario, the high-yield, low-risk profile of the typical dividend stock would be in jeopardy.

The study, conducted by Ernst & Young on behalf of EEI, offered a wealth of data points about the tax picture surrounding qualified dividends based on 2009 IRS records, but it does not speculate on the impact that a change in the tax rates would have on investors or the dividend companies they count on for consistent returns.

EEI offered its own analysis.

"This study illustrates the concentration of seniors and middle-income taxpayers relying on dividends," Jim McCrery, manager of the Alliance for Savings and Investment, an advocacy group championing permanent low rates for dividend and capital gains taxes, said in a news release the utility association released accompanying the report. "If the top tax rate is nearly tripled -- even if limited to upper-income taxpayers -- it is likely that companies would reduce their dividend payouts, which would hurt direct and indirect investors at every income level."

For EEI, an association of shareholder-owned utilities that represents some 70% of the U.S. electrical power industry, any policy activity that sways dividend rates and returns is of obvious interest. Appealing to investors with little appetite for volatility or risk, shareholder-owned utilities paid out 58% of their net income in dividends in 2011, according to EEI data.

The authors of the report also credited low dividend tax rates for driving appreciation in utility stocks over the past eight-and-a-half years, which in turn has afforded the utilities cheaper access to capital for infrastructure and capacity upgrades.

Ernst & Young's scouring of IRS records tallied 140.5 million tax returns filed in 2009. Of those, 25.4 million, or 18%, reported qualified dividends.

In its analysis of the study, EEI stressed the impact that allowing the dividend tax cuts to slide -- even if only for the top earners -- would have on older and lower-income investors, emphasizing the extent to which those segments are invested in dividend stocks.

Americans aged 65 and older of every income bracket accounted for 32% of all 2009 tax returns that reported qualified dividends in 2009, trailed slightly by the 50 to 64 age bracket, which filed 31% of the returns that included dividends. That portion dropped off to 22% among filers between the ages of 35 and 49, and 16% for those younger than 35.

"Electric and natural gas utility stocks have above-average dividend yields and below-average volatility compared to the overall stock market," the authors of the report wrote. "These two key characteristics make utility equity investments attractive to many investors near or in retirement, as well as to investors seeking current income with reduced market volatility."

The figures are more ambiguous when attempting to project an impact on low- and middle-income Americans.

For instance, EEI highlighted Ernst & Young's finding that nearly 70% of all income tax returns reporting qualified dividends in 2009 were filed by individuals or households with incomes less than $100,000. That is true: the actual figure was 68%, which means that filers with incomes of $100,000 or more accounted for the remaining 32% of returns reporting qualified dividends, the largest single percentage of any income level.

Considering Ernst & Young's finding that just 12% percent of all income tax returns reported adjusted growth incomes of $100,000 or more, it would appear that the wealthiest Americans are disproportionately heavy investors in qualified dividends.

The numbers are even more striking when Ernst & Young narrowed the field only to consider investors whose qualified dividends included payouts from utility stocks, either through direct ownership or a mutual fund. Of those, 41% had earned more than $100,000, more than twice the proportion of any of the lower income groups.

Nevertheless, if President Obama carries the day and the rates rise only for the top earners, some observers who are predicting a flight of capital from dividend stocks believe that will carry an impact from top to bottom.

"The Bush tax cuts expiring will affect all tax brackets," Sica said. "The end result [will be] that anyone in any income bracket who relies on investments for funding future growth-of-income needs will be overwhelmingly affected."

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